George Selgin, a frequent guest on David Beckworth’s Macro Musings podcast, recently discussed a range of topics including Bitcoin, debanking, and the Fed’s upcoming monetary policy review. Selgin is a proponent of targeting nominal GDP as a more effective approach compared to the current inflation targeting framework.
In the podcast, Selgin emphasizes that targeting nominal GDP can lead to better outcomes in terms of inflation rate, employment stability, and avoiding severe economic downturns. He argues that while NGDP targeting may not align perfectly with the Fed’s dual mandate, it offers a more comprehensive and flexible approach to monetary policy.
However, despite Selgin’s advocacy for NGDP targeting, it seems unlikely that the Fed will adopt this approach. Jay Powell, the current Chair of the Federal Reserve, has indicated a preference for a more traditional approach to monetary policy without makeup policy, which raises concerns about the Fed’s response to economic challenges.
Selgin points out that the Fed’s past mistakes, including both underreacting and overreacting to economic conditions, highlight the importance of finding a balanced approach to monetary policy. He suggests that the Fed may be overlooking the potential benefits of NGDP targeting in favor of a more familiar inflation targeting framework.
One possible explanation for the Fed’s reluctance to embrace NGDP targeting could be a belief that the zero lower bound on interest rates is no longer a significant concern. Factors such as higher trend inflation, stronger real economic growth, and persistent budget deficits may lead policymakers to believe that traditional inflation targeting is sufficient.
However, Selgin warns against complacency and argues for a policy regime that is adaptable to a wide range of economic conditions. He stresses the importance of learning from past crises and being prepared for unforeseen developments in the macroeconomy.
In conclusion, while the Fed may be hesitant to adopt NGDP targeting in the current economic environment, Selgin makes a compelling case for a more flexible and proactive approach to monetary policy. By considering the lessons of history and embracing a policy regime that is robust under various conditions, policymakers can better navigate the complex challenges of the modern economy.
